Worried About Tax Saving?
Make ELSS Your Portfolio’s Friend
Since the end of the financial year 2020–2021 is round the corner, investors will be more than worried about finding out ways on how to save income tax. However, an entire year of doing nothing and suddenly gauging in the tax-saving schemes can prove to be atypical on the part of the tax payer.
In this respect, ELSS that broadly means Equity Linked Savings Scheme under Section 80C is just the right mutual fund to go for and is the only class of mutual funds that will save tax and lure returns. You might be thinking why ELSS and nothing in the same category under Section 80C is weighted more than the former.
The below given information will simply eliminate all the skeptical decisions of investors and lead to investing in ELSS to ease the financial year end apprehensiveness.
What is ELSS?
-ELSS, in common parlance, Equity Linked Savings Scheme is a type of mutual fund that principally invests in equity and due to risk involved leads to comparatively gaining higher returns. The minimum lock-in period for ELSS is 3 years that will lead to gains as well as savings on tax. How strategic is that an investment!
How much can one save and gain from ELSS?
-Since investment in ELSS is majorly because of tax saving variable alongside returns, an investor can simply save as much as Rs. 46,800 on the investment of Rs. 1.5 lacs. The tax saving part is an attraction of ELSS mutual funds with returns at par to market returns and better in many cases. Other tax savings instruments have a lock-in ranging from 5 to 15 to 20 years, if you keep your investments in ELSS for a similar time frame, your returns will be much better than all the other avenues.
Moreover, instead of investing in ELSS only with the view of saving tax right before the end of financial year, investors can invest on monthly basis through SIP route. This is a smarter way of investing as well, since you can take advantage of the market volatility and rupee cost averaging. This way, there is no liquidity pressure at the end of the financial year to save taxes.
Options in ELSS:
There are 2 options in ELSS :-
Dividend Option
-Dividend Payout
Growth Option
1) Dividend Option: This option is where Dividends are paid out annually based on the profit pool of the fund. This is a good option for investors looking for Annual payouts.
2) Growth Option: In Growth option, the fund does not make any kind of dividend payout, instead, the gains are reinvested into the funds, thereby aiding the growth of the NAV. This option works very well in the long term, where you can start seeing the benefits of compounding.
The basic difference between the above two types of ELSS is the returns variable which is dividends in first wherein the dividends are declared by the fund house only from the profit reserve of the fund. Whereas, in the 2nd fund, the gains are received only at the time of redemption that are definitely subject to market risk.
However, we at our end prefer growth fund more over dividend fund, simply because, the former has more potential of good capital appreciation due to compounding over a period of time Otherwise, in dividend fund, investors will definitely receive payouts at certain period of interval but will fail to gain the advantage of compounding.
Who are most likely to invest in ELSS given the various parameters of the types of ELSS?
-Any individual who is ready to take risk as the predominant investment happens to be in equity but with a confirmation of the fact that higher the risk, higher the gains, inclusive of attractive tax benefits. Also, the investor should be willing to invest for a medium and comparatively longer term to see good gains.
Moreover, everyone who pays tax is open to investing in ELSS undoubtedly. But since the investment is completely in Equity Markets, the volatility of the investment will be more than the other traditional tax saving investment avenues.
Parameters to evaluate the best ELSS funds in the market:
Similar to other Mutual Fund category, there are many ELSS Schemes available in the Mutual Fund Space. Typically, each fund house, will have one ELSS Scheme. It is very important to analyze all the different investment schemes which are there in the space and then take a call for investment in it. Following are some of the parameters you can consider while analyzing the schemes.
Fund Returns: An investor investing in anything will be primarily concerned about his/her returns over the period of time in comparison to the other available options along with the given lock-in period and risk exposure. The returns are majorly based on the class of stocks selected under a particular scheme. What the investor should look at is consistency of returns over different time horizon.
Fund Manager History: Ultimately, the fund manager is the person responsible for portfolio construction and thus the fund returns. Investor should compare the consistency of returns in all schemes managed by the fund manager. Need to understand, if the fund house has a proper structure in terms of selection of stocks in the portfolio, or is it dependent on the fund manager only.
Expense Ratio: As the name suggests, it is clearly hinting towards calculating the amount of expenditure done towards maintain and managing the fund which definitely should be worth the returns. A lower expense ratio leads to greater take-home returns while, a higher expense ratio leads to lesser take-home earnings.
Financials: Financials are nothing but the performance of a specific fund based on various financial ratios considering SD, Sharpe ratio, Sortino ratio, Alpha and Beta. SD i.e. Standard Deviation calculates the risk is just synonymous to what Beta indicates and therefore, if it is higher, then risk is in the higher range. However, a fund with high Sharpe Ratio is a better managed fund in terms of its Risk-Reward ratio.
The inter fund comparison is only easy when an investor decides to go with ELSS amongst the many tax saving investments. ELSS however, remains grounded due to its higher return fetching capacity against other investment schemes.
ELSS in comparison to other investment schemes:
Tax Benefit Investment Schemes:
